April is a month when a lot of investors review their Stocks and Shares ISA. A new tax year can help turn one’s mind to what to do in the market, after all. I had been thinking about how to boost my passive income streams and last week snapped up a FTSE 100 dividend stock that has among the highest yields in that index.
The 9.8% yield means that, for every £100 I invest now, I will hopefully earn £9.80 in dividends annually. Not only that, but the company has raised its dividend annually over the past few years. If that continues, my prospective yield might be even higher than 9.8%.
That certainly attracts me, as the average FTSE 100 dividend yield right now is below 4%.
Household name with millions of customers
Still, I do not choose shares to buy just based on their yield.
After all, dividends are never guaranteed to last. So, while the yield does play a role in my decision making, it is at the end of the process.
Whether for a growth or dividend stock, I first look to see whether I can buy a stake in what I think is a great company at an attractive price.
In this case, I felt the answer was yes.
The dividend stock I bought this week is M&G (LSE: MNG). The asset manager is a household name, with a well-regarded brand and operations across markets worldwide. It has millions of retail customers, as well as an institutional business.
Why I like the business
There are quite a few things I think look good about M&G from an investment perspective that helped shape my decision to purchase.
One is the size and durability of the market. Demand for asset management is high and I expect it to remain that way, even if there are ebbs and flows depending on how much disposable income investors are sitting on.
Another attractive feature is the structural economics of that market. Asset management involves large sums – M&G has a whopping £344bn of assets under management and administration – and so even small fees and charges can soon mount up, helping asset managers profit.
Servicing millions of retail customers offers economies of scale. The marginal cost of servicing the five millionth client is likely very small compared to the first client, yet they can be charged the same fees. That is good for profit margins.
Long-term dividend potential
That does not mean that M&G faces no risks. It does.
That large, attractive market attracts lots of rivals. That can put pressure on profit margins. The company is in the middle of a cost-cutting programme and those can bring risks as well as benefits, especially if customers feel they lead to reduced service levels.
On balance, though, I see this as a strong business and think the share price is attractive. As blue-chip dividend stocks go, a 9.8% dividend yield strikes me as very attractive indeed!
